Madrid.- The First Vice-President of the Government and Minister of Finance, María Jesús Montero, has today presented the proposal for a new financing model, which includes the criteria for the distribution of public resources between the autonomous communities. The new model is estimated to bring in 2027, when it is expected to enter into force, 20,975 million more than the communities would obtain if the current model were maintained. The total resources that this model will distribute in 2027 are estimated at 224,507 million. In the last liquidated year, which corresponds to 2023, the autonomous communities received 152,484 million from the financing system.
In the case of Aragon, the proposed model would mean increasing the resources it would receive with the current model by 630 million per year.
At a press conference at the headquarters of the Ministry of Finance, Montero stressed that the proposed model is beneficial to the entire autonomous system because it increases the autonomous resources to protect the Welfare State, strengthens and broadens interterritorial solidarity, increases fiscal autonomy and co-responsibility, respects and collects territorial singularities, guarantees the principle of sufficiency so that all communities can offer quality public services throughout the territory and reduces distances in financing per inhabitant.
Montero explained the basis of this new financing model, thus fulfilling the promise of the President of the Government, Pedro Sánchez, to propose a broader and fairer financing for the CCAA while recognizing the singularities of each territory. This proposal has been sent to all the regional governments for their knowledge, so that it can be debated and analyzed next Wednesday in an extraordinary Fiscal and Financial Policy Council (CPFF).
Montero stressed that the proposal reflects “a great work of the team of the Ministry of Finance, which has collected and analyzed countless proposals from regional parliaments, experts or study centers” to devise a financing model that responds to the “general interest” and that incorporates “fair, clear and transparent guiding principles”. For this reason, he called on the CCAA to come to the CPFF meeting in a “constructive spirit.”
Bases and principles of the new model
The new model of regional financing incorporates new distribution criteria, methodological improvements and is limited to principles that for the Executive are priorities:
· A new adjusted population proposal is included that contemplates new variables that respond to the challenge of depopulation and incorporates a more precise stratification of population groups.
· Increased tax capacity, which increases fiscal autonomy and co-responsibility and strengthens the principle of sufficiency.
· It expands, strengthens and guarantees interterritorial solidarity through an equitable, objective and transparent horizontal levelling mechanism.
· Vertical levelling is also guaranteed with an additional contribution from the central administration that will increase investment in health and public education and social policies.
· Greater autonomy is also reflected in the possibility for communities to receive the collection of VAT generated by SMEs in their territories.
· The model adapts to the new realities by including a fund to face the challenge of climate change
· Status quo guarantee, whereby no regional CCAA receives less than with the previous model.
· Supplementary financing mechanism.
The improvement in funding in the case of Aragon is because it is one of the communities most benefited by the adjusted population criteria, because the new model contemplates the variable of fixed costs, which benefits autonomous communities that face the problem of depopulation.
In particular, its adjusted population is 8% larger than the real population. That is, for the financing model, the Aragonese community has 107,000 more inhabitants than those who appear in its register.
New criteria in the adjusted population
Along with the State’s greater contribution to the system, one of the fundamental elements of the new model is the criterion of adjusted population, where Aragon is especially benefited. It determines the number of inhabitants of each autonomous community by weighing variables that influence the cost of services and financing needs.
Thus, the distribution of autonomous resources is defined according to the demographic, socio-economic and geographical characteristics of the autonomous communities. For example, health spending will be higher in a very ageing community, while another community will have greater needs in education if it has a higher proportion of school-age inhabitants.
As María Jesús Montero recalled, last February the Government opened a negotiation process with the communities to update the criteria that determine the adjusted population. Finally, it was not possible to reach a consensus and it was the communities themselves who called on the Executive to submit a proposal, as has happened.
After incorporating the methodological improvements, the main variables that make up the Government’s improved adjusted population proposal are as follows:
- Population Padrón. One of the most relevant variables. It accounts for 30% of the adjusted population weight.
- Equivalent protected population. Pretende representar el gasto sanitario, partida presupuestaria más amplia en el ámbito autonómico. Its weight is 38%. For its calculation, it is divided into 20 age groups, leaving behind the seven of the current model. This allows greater reliability in the delimitation of the resources necessary for the different population groups. In other words, health costs are approximated according to the age of the beneficiaries.
- Education. To determine the educational expenditure, the number of inhabitants between 0 and 17 years old is taken into account, whose weighting reaches 17%. And, in addition, two other new criteria are introduced, such as the number of inhabitants between 18 and 24 years old and the number of university students who move to study in other communities. This recognizes the cost of a community hosting students from other regions in its education system. These variables add up to a weight of 3.5%.
- Social services. The base is the population over 65 years of age, which makes much more use of health-related services or dependency. The novelty is that it is broken down into two sections, between 65 and 79 years old and over 80 years old. The weighting of this variable is 7%. Another novelty is the addition of the number of unemployed without benefits, with a weight of 1.5%, as representative of poverty and social exclusion.
Along with these relevant elements to determine the adjusted population, the model includes others that affect the cost of public services. And that will especially help the autonomies that face the challenge of depopulation:
· Surface. The square kilometers of each community account for 1.6% of the weighting.
· Dispersion. It has a weight of 0.5%. It is determined according to the singular entities of inhabited population.
· Insularity. It is 0.5% in the calculation.
· Fixed costs. This is a new approach advocated by numerous regional CCAAs. It has a weighting of 0.4%, especially benefits communities affected by depopulation and recognizes the difficulty existing in some communities to achieve economies of scale due to their low population.
Precisely Aragon benefits so much from the adjusted population criteria because the model takes into account elements related to depopulation. For example, it incorporates the aforementioned new variable of fixed costs, which implies recognizing the cost overrun for autonomous communities with a small population to exercise their competences when they do not achieve economies of scale. In this sense, Aragon appears as one of the communities that most benefits from the variable of fixed costs.
It also obtains advantage in other criteria that are also related to depopulation, such as the surface of the territory.
Increase in tax capacity
Most of the resources of the autonomous communities come from the taxes ceded and the proposal presented by the Government contemplates increasing the tax capacity of all the communities, which will result in more income and autonomy.
Currently, the tax capacity of the communities is determined by the normative collection of the following taxes:
· 50% of IRPF and VAT.
· 58% of special taxes on tobacco, alcohol, beer and hydrocarbons.
· 100% of Taxes such as Inheritance, Property Transfers and Documented Legal Acts, Special on Certain Means of Transport, taxes on gambling and the Electricity Tax.
This new financing model proposes an increase in this tax capacity, making it easier for them to have more income and greater fiscal autonomy. In particular, resources will increase by nearly $16 billion by 2027.
The most significant modification is the increase in the transfer for IRPF and VAT. With the new model, IRPF would yield 55% and VAT would yield 56.5%. In addition, taxes on heritage, bank deposits, gambling activities and on the disposal of waste in landfills will be included in the resources of the financing system.
Horizontal levelling
As Montero has pointed out, the model strengthens and extends interterritorial solidarity. This translates into ensuring that all communities reach 75% of the average adjusted per capita resource determined from their tax capacity.
In this way, communities with below-average per capita funding will receive more resources, while those above the average will contribute to the common good of the system. This serves, on the one hand, to guarantee interterritorial solidarity and, on the other, to reduce the distances in financing per inhabitant.
Vertical levelling
This parameter is the one that most clearly makes visible the commitment of the Government and the State with the autonomous communities and the Welfare State. With a contribution of 19 billion, the initial objective is to reduce by 2/3 the distance of each CCAA from the one with the most resources, which is the Community of Madrid. This calculation will allow those more remote communities to receive more resources compared to those that enjoy a better position.
The resources that the State initially contributes to vertical levelling will come from 5% of the IRPF yield and from an additional transfer until it succeeds in reducing by 2/3 the distance of all communities from which it has greater resources.
Rest of elements
All the above parameters represent 99% of the autonomous resources, which have been allocated after determining the tax capacity and establishing the horizontal and vertical levelling mechanisms. The model contemplates other elements, but with less economic importance.
· VAT Mechanism for SMEs. To move forward with greater fiscal autonomy and co-responsibility, while encouraging economic development, CCAAs will be able to receive a portion of the VAT collection generated by SMEs in their territory. With this measure, which must be requested by the autonomies, the effort of the autonomous communities in promoting and supporting small and medium-sized enterprises is recognized. The amount arises from calculating the difference that exists in the community between the relative weight of VAT paid by SMEs in that territory and the consumption index. If the VAT of SMEs exceeds the consumption rate, the community will receive a positive transfer for the difference. Otherwise, the amount will be negative.
A relevant aspect is that the funds of this phase are not competitive, so an increase in resources in one territory does not involve removing them from another.
· Climate fund. Faced with the challenges of the climate crisis, the financing system will be provided with a climate fund of about 1 billion. Two thirds of it will be distributed among the autonomies of the Mediterranean coast, the most affected by its exposure to the warming of the Mediterranean Sea and its effect on the climate. The remaining third will be received by the other communities. The distribution will be carried out under the criterion of adjusted population.
· Guarantee of status quo. There will be a closing element to guarantee the status quo, so no community, at the beginning of application of the system, will receive fewer resources than it would have obtained with the previous model. This mechanism will be financed with contributions from the central administration, which will contribute some 400 million to this end, which will especially benefit Cantabria and Extremadura.
The status quo is the last element of the financing model and it acts as a closure. In any case, the First Vice-President of the Government and Minister of Finance has outlined other aspects of the proposal related to tax management and the financing of non-homogeneous competences.
Supplementary funding mechanism
The proposed model establishes that the financing of non-homogeneous competences may come from a higher percentage of VAT ceded. This additional assignment will be fixed in the base year according to which each autonomous community is assigned.
This is an optional mechanism. Therefore, if the communities so wish, they will be able to choose to receive the financing of non-homogeneous competences as before through a transfer evolved by the State Income Index (ITE).
As in the case of VAT for SMEs, the option to choose is again given, which strengthens the autonomy of the communities and reflects the flexibility of the new financing model.
Increased responsibilities in tax management
The First Vice-President of the Government and Minister of Finance has pointed out that the intention of the Executive is to reformulate the operation of the current model, in which communities receive payments on account according to the forecast of tax collection. A model in which up to two years later the definitive liquidation is not carried out.
“We want to approach with the communities a negotiation so that the liquidations are before and are carried out more quickly,” he said at the press conference at the Ministry. Under this premise, Montero has announced that “communities that wish to do so will be able to benefit from a common or shared cash system in which income from personal income tax and other taxes will simultaneously reach the state and regional administration”. The decision to participate in this new payment system will be manifested by each community in the Joint Commission with the State and may be modified every five years.
In order to enhance cooperation and coordination between the State and the autonomous communities, the Vice-President has also announced the intention of the Executive to launch a new “network management model of the tax system”. The objective is that the autonomous communities can assume more managerial competences, always in coordination with the State.
A model that reduces the differences between communities
Montero has highlighted that this model improves equity insofar as the differences between the community with more and less resources per adjusted inhabitant increases from 1,500 euros with the current model to 477 euros with the system proposed before the status quo phase. After the correction so that no community receives less money than with the previous model, the differences are located at 700 euros. In other words, less than half of the differential shown by the current model.
The first vice-president insisted on the idea that the government’s proposal benefits all the autonomous communities. And the will of the Executive has advanced to enable a specific tranche in the Interterritorial Compensation Fund to strengthen the financing of the CCAA and guarantee an additional contribution to all the autonomous communities that are below the average in the financing per inhabitant. Montero has argued that this measure has an obvious economic logic. “If a community is below the average in financing per inhabitant, it means that it is less dynamic economically and this is improved through more resources, but also with better investments and infrastructures,” he concluded.
Montero has concluded that the main strengths of the model are that it increases resources to strengthen the Welfare State, respects territorial singularities, strengthens and guarantees interterritorial solidarity, increases fiscal autonomy and co-responsibility and makes compatible the coexistence of multilateral and bilateral negotiation mechanisms.